A securities trader receives orders to trade certain quantities of a security and, in response to these orders, the trader will buy or sell the security in one or more transactions made over the course of a certain time period. For example, a trader may receive an order to buy 50,000 shares of IBM stock that he or she may break up in 10 different transactions of varying amounts and varying prices over the course of a trading day. At the end of the trading day, the trader will have obtained 50,000 shares at a certain average price per share.
It is often useful to measure the quality of the price obtained by the trader for an order. Various tools are used in the securities trading industry to provide a measure of the performance of one or more executed orders. One way of measuring performance of an executed order is to compare the actual trade price with the volume weighted average (VWAP) of the security over the time period which the trader executed the order or over the course of the entire trading day the order was executed. The VWAP is computed most easily by dividing the total dollar value of all trades by the total trading volume in shares. Another way of measuring the performance of an executed order is to compare the actual trade price with the market price of the security when the trader received the order. This market price may be the price of the security in the transaction for the security that immediately preceded the time the order was received. Alternatively, the market price may be an average price of the security for a certain time period before the order was received, e.g., the average price for the five minute period before the order was received. Still other ways of evaluating the quality of a trade include comparing the trade price to an opening or closing price of the security for the day in question. While each of these techniques provide some measure of the performance of an executed order, they do not account for the effects on execution performance of market momentum and volatility that occurs during the trading period.
A securities trading simulator as described in more detail below simulates an executed trade and provides for another way to measure the quality of a trade. Such a trading simulator accounts for the effects of momentum and volatility, and, thus may provide a more realistic measure of trade quality. A securities trading simulator, however, is not limited to application as a benchmarking tool, but rather may also be used in a number of different ways. For example, a securities trading simulator may be used to predict opportunity and risk before a trade is made or used in the valuation of derivatives.